This paper studies the effects of bilateral foreign aid on conflict escalation and deescalation. First, we develop a new ordinal measure capturing the two-sided and multifaceted nature of conflict. Second, we propose a dynamic ordered probit estimator that allows for unobserved heterogeneity and corrects for endogeneity. Third, we identify the causal effect of foreign aid on conflict by predicting bilateral aid flows based on electoral outcomes of donor countries which are exogenous to recipients. Receiving bilateral aid raises the chances of escalating from small conflict to armed conflict, but we find little evidence that aid ignites conflict in truly peaceful countries. © 2020 The Authors. Journal of Applied Econometrics published by John Wiley & Sons Ltd